More Corn Price Spikes Ahead

New study shows rising ethanol demand and future climate change scenarios may cause even more volatility for corn prices.

Apr 23, 2012

Here's news the corn market likes to hear. A new study from Purdue and Stanford university researchers predicts that future climate scenarios may cause significantly greater volatility in corn prices. And the researchers say that could be compounded by the federal biofuels mandate.

The findings were published this week in Nature Climate Change and show that severely hot conditions in corn-growing regions and extreme climate events that are expected to impact supply would cause swings in corn prices. They're predicting that volatility could increase by as much as 50% over the period from 2020 to 2040 compared to recent history.

HOT QUESTION: Will warmer weather add up to more price volatility? A new study says 'yes.'

In a press statement about the report, Thomas Hertel, Purdue distinguished professor of agricultural economics says: "There could be quite a substantial increase in yield volatility, and that's due to the increased frequency and intensity of high temperatures throughout the Corn Belt. Closer integration of the corn and energy markets through the ethanol industry could aid in buffering these shocks, but this would not occur in the presence of a mandate."

The current Renewable Fuels Standard keeps ramping up ethanol need each year to be blended with gasoline. Currently 39% of the corn crop goes to ethanol, and about one third returns to the food system in the form of products fed to livestock.

Using what they call a high-resolution climate model for the United States, which takes into account climate history to produce 25-kilometer "snapshots" of the Midwest under projected future climate scenarios, the researchers looked at five simulations from 1950 to 2040. These were combined to estimate future temperature extremes. That information was then paired with a model that uses temperature, precipitation and tech trends to predict corn yields.

Even if temperatures stay within the internationally recognized climate change target - 3.6 degrees F above pre-industrial levels - climate change is enough to make damaging heat waves more common in the U.S. Corn Belt, researchers say. "Severe heat is a big hammer," notes Noah Diffenbaugh, assistant professor of earth sciences at Stanford, and study co-author. "We find that even one or two degrees of global warming is likely to increase heat waves enough to cause much higher frequency of low-yield years, leading to greater volatility in corn prices."

Using Purdue's Global Trade Analysis Project model and ignoring potential adaptations, the researchers predicted U.S. corn price volatility over the 2020-2040 period as compared with the 1980-2000 period. This increase would be further exacerbated by biofuel mandates, which would result in a further 50 percent increase in price volatility, Hertel said.

Under the projection, prices would rise in years when corn yields are hurt by extremely hot days. Hertel said that ethanol plants, forced to meet the federal mandate for biofuel production, would be forced to bid up corn prices in order to meet the blend requirement, thereby exacerbating the effect of the production shortfall on livestock producers and consumers.

Hertel said the study holds all other factors constant. It's possible that plant breeding to raise the temperature threshold at which yield losses occur, increased stockholding activities by farmers and agribusinesses, shifting growing areas northward, or changes in federal regulations could moderate the projected increases in price volatility. Finally, the study assumes that the so-called "blend wall," which has played a key role in limiting increases in ethanol use in gasoline, would be relaxed as the automobile stock is modernized.